Bahrain Debt Risk Rises Most on Record Amid Gulf Aid Silence

(Bloomberg) -- The absence of any signal of financial aid from Bahrain’s neighbors sent the kingdom’s credit risk rising the most in emerging markets this month.

The cost of insuring Bahrain’s debt against default for five years jumped 170 basis points on Monday, the most since records began in 2008, to 609. That’s the highest among emerging-market peers after Lebanon. The dinar, whose peg to the dollar has been effectively unchanged since 1980, fell a fourth day in the onshore market to the weakest level since at least 1988.

The central bank said Tuesday it’s committed to keeping the dinar’s peg, spurring a decline in the yield on Bahrain’s dollar bonds due 2022. But the authority’s assurances won’t ally investors’ fears, said Nick Stadtmiller, the lead Gulf analyst at Medley Global Advisors.

“That’s because the question isn’t whether the central bank is committed or not, the question is whether they have the FX reserves to keep it going,” said Stadtmiller.

The central bank’s foreign exchange assets plummeted to a 2001 low of about $1.2 billion last year. They have almost doubled since, helped by cash raised through bond sales, but the government has about $2 billion of interest payments on bonds through 2019, according to data compiled by Bloomberg.

The International Monetary Fund expects the island kingdom’s debt to exceed 100 percent of economic output in 2019.

No Sign of Aid

Investors are seeking reassurance from Bahrain’s Gulf allies that they will offer assistance to the cash-strapped nation. Its debt has also been battered as escalating trade tensions between the U.S. and China damped demand for riskier assets.

“The deterioration in macro fundamentals has been well-flagged for a while, but markets have just now started pricing this in,” said Carla Slim, an economist for Standard Chartered Plc in Dubai. “Nervousness is increasing on the uncertainty of Bahrain’s outlook given the lack of a medium-term debt sustainability plan and the absence of explicit support from Gulf Cooperation Council allies.”

Read more about Bahrain’s debt-market troubles

  • The yield on Bahrain’s dollar-denominated bonds maturing in July 2022 rose to a record 9.26 percent Monday, before falling to 9.04 percent Tuesday. In comparison, Ghana’s bonds due a year later yielded about 7.40 percent even though they are rated two levels lower by S&P Global Ratings than Bahrain’s B+. The Gulf nation’s debt is rated junk by the three major companies
  • Five-year credit default swaps for Bahrain’s bonds climbed 170 basis points to a nine-year high of 609 Monday
  • Currency derivatives show traders were the most bearish on the dinar since 2016, as twelve-month forwards for the dinar climbed to 440 in the offshore market Monday. The currency is pegged to the dollar at 0.37608

Bahraini officials have repeatedly said they don’t plan on abandoning the peg to the dollar. But if the country were forced to shift its currency policy, it would raise doubts that other members of the Gulf Cooperation Council can sustain their pegs.

“None of the Gulf countries can afford another Gulf country to break the peg with the dollar,” Stadtmiller said. “If Bahrain were to go, then Oman would be next as these speculative attacks tend to be contiguous. And bailing out Oman would cost about ten times as bailing out Bahrain. So it’s much cheaper to deal with Bahrain.”

The nation, which has been slow to implement reforms after oil prices fell, was said to have asked Saudi Arabia, the United Arab Emirates and Kuwait for financial assistance last year as it sought to replenish foreign reserves and avert a devaluation. It’s the only Gulf oil producer that needs prices to climb beyond $100 a barrel in order to balance its budget this year, according to IMF estimates. Brent crude was about $75 a barrel on Tuesday.

“Investors will at least want to see a firmer commitment to austerity,” Jason Tuvey, an emerging-market economist at Capital Economics in London, wrote in a note. “Without this and an explicit guarantee of support from the rest of the Gulf, Bahrain’s financial markets will remain under pressure and dollar-bond spreads are likely to widen further.”

©2018 Bloomberg L.P.

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